Bajaj Finance’s (BAF) mid quarter update in June 2021 cautioned investors about a bumpy road ahead. Its stock price fell 5% after the management indicated higher provisions and elevated non-performing assets (NPAs), impacted by the second wave of the Covid-19 pandemic. With June 2021 quarter results coming in, Bajaj Finance stock price is near its 52-week high, a 4% increase since July 20, 2021.

While the Q1FY22 results were below expectations, the street looked beyond the Covid-19 second wave’s transitory pain. Investors are also enthused by BAF’s business transformation journey culminating in October this year. Analysts, on the other hand, remain cautious on BAF’s asset quality and new customer acquisition due  to uncertainty about a third pandemic wave.

Quick Takes:

• Bajaj Finance is cautious on retail EMI Cards (REMI) business capped at 50,000 accounts a month, where the ticket size increased to Rs 14,000-15,000

• The company is moving into the gold loan business by opening 25 standalone branches, 13 in Jaipur and 12 in Vizag

• Average EMI bounce rate in Q1FY22 was around 1.08x of Q4FY21 and improved to 0.96x in July 2021

• In the absence of a third Covid19 wave, the company expects quarterly AUM growth rate for balance of the year to be at pre-COVID levels

• The company launched its wallet business on July 1, 2021 and expects to onboard over five million customers in FY22

Bajaj Finance delivers muted June 2021 quarter performance

The impact of Covid-19 second wave was largely reflected in BAF’s June 2021 quarter performance. Asset quality deteriorated, net interest income (NII) declined and net profit was reported in the low single digits, a 4% YoY growth. YoY numbers look strong, supported by corresponding quarter’s lower base due to national lockdown from March 23 till end of May 2020 in Q1FY21. It’s sequential growth we should be looking at, and it gives us a better picture of the impact of the Covid-19 second wave.   

Assets under management (AUM) came in at Rs 1,59,057 crore in Q1FY22 compared to Rs 1,52,947 crore in March 2021 quarter, a rise of 4% QoQ.  Net interest income at Rs 4,489 crore rose 8% YoY and on a sequential basis fell 4%. As Covid-19 second wave impacted collections, loan losses and provisions rose 42% QoQ to Rs 1,750 core (down 4% YoY).

Impacted by higher provisions and lower NII, BAF reported a net profit fall of 25% QoQ at  Rs 1,002 crore in June 2021 quarter and a rise of 4% YoY. Asset quality deteriorated as gross NPAs (percentage of gross NPAs to gross advances) stood at 2.96% in Q1FY22 compared to 1.79% in the March 2021 quarter. Net NPAs (percentage of net NPAs to net advances) rose 71 basis points (bps) QoQ to 1.46% in Q1FY22. NPA numbers are strictly not comparable due to implementation of EMI moratorium in Q1FY21 as directed by the Reserve Bank of India. BAF’s subsidiary, Bajaj Housing Finance’s AUM came in at Rs 40,941 crore, up 24% YoY and its NII jumped 38% YoY to Rs 335 crore in Q1FY22.

Auto finance increases asset quality woes

Speaking on June 2021 quarter numbers, Rajeev Jain, the Managing Director at Bajaj Finance said that both BAF and Bajaj Housing and Finance were affected due to strict lockdowns across most parts of the country. Core AUM growth declined to Rs 4,100 crore in Q1FY22 compared to Rs 9,397 crore in the March 2021 quarter impacted by B2B rural and urban business dialing down due to Covid-19 disruption. The company’s B2B business is around 16% of total AUM. Auto finance, 45% of BAF’s B2B business, was the most impacted and the asset quality deterioration witnessed in Q1FY22 was mainly due to problems with this segment. The company could garner 70% of its planned volumes in auto finance in April and only 40% in May.

The auto finance business constitutes 7% of the total AUM mix. The segment’s AUM stands at Rs 11,347 crore of which 3-wheeler loans exhibited the largest stress constituting 30% of total auto finance’s AUM. Auto finance gross NPAs increased to 19.2% in Q1FY22, up from 9.3% in Q4FY21. Net NPAs increased to 12.18% in Q1FY22 from 4.84% in the March 2021 quarter. If there are no more business disruptions through lockdowns, the auto finance business will claw back to strength and profitability, said Jain. Total net NPAs at company level in Q1FY22 were Rs 2,307 crore of which 74% are secured assets and auto finance constitutes 80% of these secured NPAs.  

The pandemic pain in the form of asset quality concerns and low revenues are transitory and Bajaj Finance has in fact delivered a decent June 2021 quarter. The company’s customer acquisition and new loan metrics were healthy. BAF booked 4.63 million new loans in Q1FY22 and acquired 1.88 million new customers.

Customer franchise crossed the 50 million milestone and stood at 50.45 million customers  as of June 30, 2021, a rise of 17% YoY. Cross sell franchise also stood at 27.43 million, a growth of 14% YoY. BAF’s new customer additions in the June 2021 quarter were in line with management’s guidance of adding 7-8 million new customers annually. Operating amid Covid-19 second wave lockdowns, these metrics look resilient. But apart from BAF’s resilience, the company’s significant focus on digital transformation has held investor interest steady over the past few quarters.

To compete with the rising fintech threat, BAF is launching in October 2021, an omni-channel consumer app allowing customers to move from offline to online and vice-versa in a frictionless manner. This app will allow customers to compare various financial products, insurance, broking, health, investment etc before taking a buy call. This new technology structure, management hopes, will enhance agility, business scale, customer stickiness and reduce operating expenditure for BAF.  

‘Optimistically cautious' future growth outlook

In the absence of Covid-19 third wave, BAF management expects its quarterly AUM growth rate to go back to pre-Covid levels (quarterly growth of above 35% YoY). Jain said that the management is committed to improve asset quality and bring down gross NPA ratio to 1.7% to 1.8% and net NPA ratio to 0.7% to 0.8% either by flowing through P&L or through portfolio improvement. 

Cost of funds declined to 7.1% in Q1FY22 from 7.4% in March 2021 quarter as the company dialed down its liquidity buffer to Rs 8,500 crore. To reduce cost of funds further, the management aims to increase commercial paper (CP) share to 8% of total borrowings. Bajaj Finance also took several steps to reduce its operating expenditure, which was around Rs 250 crore during the quarter, to partially mitigate the financial impact caused by Covid-19 second wave. As the sales activity increases, opex/NII ratio is expected to normalize from 30.6% in Q1FY22 to around 33% by Q4 FY22. 

But this guidance will only sustain in the absence of a Covid-19 third wave. Or as HDFC Bank management put it, a benign third wave, where the Delta and newer variants don’t emerge as supervillains.